UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2001
-------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________________ to ___________________
Commission File Number: 0-12456
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AMERICAN SOFTWARE, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1098795
- ------------------------------------ -------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
470 East Paces Ferry Road, N.E., Atlanta, Georgia 30305
- ------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(404) 261-4381
------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
-------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes Outstanding at March 12, 2001
- ----------------------------------- -----------------------------
Class A Common Stock, $.10 par value 18,692,250 Shares
Class B Common Stock, $.10 par value 4,082,289 Shares
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Form 10-Q
Quarter ended January 31, 2001
Index
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Page
No.
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- Unaudited - January 31, 2001 and April 30, 2000 3
Condensed Consolidated Statements of Operations
- Unaudited - Three Months and Nine Months ended January 31, 2001
and 2000 4
Condensed Consolidated Statements of Cash Flows
- Unaudited - Nine Months ended January 31, 2001 and January 31, 2000 5
Notes to Condensed Consolidated Financial Statements - Unaudited 6-10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 11-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II - Other Information 21
2
PART I FINANCIAL INFORMATION
------
Financial Statements
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands except share and per share data)
(Unaudited)
January 31, April 30,
2001 2000
----------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,188 $ 12,910
Investments - current 16,104 21,457
Trade accounts receivable, less allowance for doubtful accounts
of $1,656 at January 31, 2001 and $1,739 at April 30, 2000:
Billed 12,145 15,233
Unbilled 3,008 5,143
Deferred income taxes 1,975 1,975
Prepaid expenses and other current assets 1,895 2,099
--------- ---------
Total current assets 44,315 58,817
Investments - noncurrent 5,396 9,878
Property and equipment, less accumulated depreciation 17,977 18,614
Intangible assets, less accumulated amortization 13,960 23,391
Other assets 1,682 2,347
--------- ---------
$ 83,330 $ 113,047
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 1,870 $ 1,493
Accounts payable 3,564 3,505
Accrued compensation and related costs 3,885 4,545
Income tax payable 1,215 3,122
Other current liabilities 4,954 7,012
Deferred revenue 13,803 15,936
--------- ---------
Total current liabilities 29,291 35,613
Obligations under capital leases, net of current portion 1,346 907
Deferred income taxes 1,975 1,975
--------- ---------
Total liabilities 32,612 38,495
--------- ---------
Minority interest in subsidiaries 3,782 4,846
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 21,617,438 shares at January 31, 2001 and
21,476,284 shares at April 30, 2000 2,162 2,148
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,082,289 shares at January 31, 2001 and
4,086,289 shares at April 30, 2000; convertible into Class A
shares on a one-for-one basis 408 409
Additional paid-in capital 65,946 65,241
Other comprehensive income 244 247
Retained earnings (4,320) 19,165
Class A treasury stock, 2,925,188 shares at January 31, 2001
and 2,925,188 shares at April 30, 2000, respectively (17,504) (17,504)
--------- ---------
Total shareholders' equity 46,936 69,706
--------- ---------
$ 83,330 $ 113,047
========= =========
See accompanying notes to condensed consolidated financial statements -
unaudited.
3
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
--------------------------------- -----------------------------------
2001 2000 2001 2000
---------------- --------------- ---------------- ----------------
Revenues:
License $ 3,356 $ 5,537 $ 8,831 $ 18,157
Services and other 12,763 13,884 38,532 45,174
Maintenance 5,763 6,382 18,092 18,889
----------- ----------- ------------ ------------
Total Revenues 21,882 25,803 65,455 82,220
----------- ----------- ------------ ------------
Cost of Revenues:
License 1,652 1,394 4,532 4,120
Services and other 11,556 11,203 34,030 34,121
Maintenance 963 2,436 4,393 7,466
----------- ----------- ------------ ------------
Total Cost of Revenues 14,171 15,033 42,955 45,707
----------- ----------- ------------ ------------
Gross Margin 7,711 10,770 22,500 36,513
----------- ----------- ------------ ------------
Operating expenses:
Research and development 3,516 4,773 12,166 14,979
Less: capitalized development (619) (2,594) (2,875) (8,152)
Sales and marketing 5,140 5,949 17,763 18,849
General and administrative 4,217 3,361 10,328 10,370
Provision for doubtful accounts 1,464 152 1,826 233
Charge for asset impairment and
restructuring 242 - 10,416 -
----------- ----------- ------------ ------------
Total operating expenses 13,961 11,641 49,624 36,279
----------- ----------- ------------ ------------
Operating income (loss) (6,250) (871) (27,124) 234
----------- ----------- ------------ ------------
Other income 474 625 1,554 1,746
Loss on investments (1,009) (1,342)
Minority interest 487 (172) 1,009 (341)
----------- ----------- ------------ ------------
Income (loss) before taxes (6,297) (418) (25,903) 1,639
Income taxes 2,421 - 2,421 (150)
----------- ----------- ------------ ------------
Net Income (loss) $ (3,880) $ (418) $ (23,486) $ 1,489
=========== =========== =========== ============
Basic net income (loss) per common share $ (0.17) $ (0.02) $ (1.03) $ 0.07
=========== =========== =========== ============
Diluted net income (loss) per common
share* $ (0.17) $ (0.02) $ (1.03) $ 0.07
=========== =========== =========== ============
Weighted average common shares outstanding:
Basic 22,771 21,476 22,715 21,559
=========== =========== =========== ============
Diluted 22,771 21,476 22,715 22,764
=========== =========== =========== ============
*Diluted weighted average common shares outstanding are not included in the
quarter ended and nine months ended January 31, 2001 and the quarter ended
January 31, 2000 calculations due to the anti-dilution of the net loss per
share.
See accompanying notes to condense consolidated financial statements -
unaudited.
4
AMERICAN SOFTWARE, INC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands) Nine Months Ended
January 31,
-------------------------------
2001 2000
-------------- --------------
Cash flows from operating activities:
Net (loss) income $(23,486) $ 1,489
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 9,050 7,575
Provision for (recovery of) doubtful accounts 1,826 233
Income tax benefit - non-cash portion (1,713) -----
Minority interest in subsidiaries (loss) income (1,009) 341
Net (gain) loss on investments (142) -----
Charge for asset impairment and restructuring - non-cash portion 9,712 -----
Loss on impairment of cost method investments and majority owned subsidiary 1,342 -----
Change in operating assets and liabilities:
Purchases of trading securities (1,491) (8,550)
Proceeds from trading securities 5,696 5,464
Proceeds from sales and maturities of investments 273 5,954
Decrease/(increase) in Accounts receivable 3,397 160
Decrease/(increase) in Prepaid expenses and other assets (474) (560)
(Decrease)/increase in Accounts payable and other accrued liabilities (3,366) 2,264
(Decrease)/increase in Deferred revenue (2,133) (1,351)
-------- --------
Net cash (used in) provided by operating activities (2,538) 13,019
-------- --------
Cash flows from investing activities:
Additions to capitalized software development costs (2,875) (8,152)
Additions to purchased computer software costs (616) (98)
Purchase of majority interest in subsidiaries (517) (658)
Minority investment and additional funding in business ----- (423)
Repurchase of common stock by subsidiary (105) (736)
Purchases of property and equipment (1,267) (1,462)
Sales (purchases) of short term investments, net 5,500 (3,305)
-------- --------
Net cash provided by (used in) investing activities 120 (14,834)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt ----- (950)
Payment of capital lease obligation (1,721) (1,701)
Repurchase of common stock ----- (1,256)
Proceeds from exercise of stock options 382 1,349
Proceeds from dividend reinvestment and stock purchase plan 35 3
-------- --------
Net cash used in financing activities (1,304) (2,555)
-------- --------
Net (decrease) increase in cash and cash equivalents (3,722) (4,370)
Cash and cash equivalents at beginning of period $ 12,910 $ 21,567
-------- --------
Cash and cash equivalents at end of period $ 9,188 $ 17,197
======== ========
Cash paid for income taxes $ ------ $ 11
======== ========
Cash paid for interest $ 130 $ -----
======== ========
Supplemental disclosure of noncash investing, and financing activities:
Assumption of capital lease obligations for property and equipment $ 2,537 $ 1,718
======== ========
See accompanying notes to condense consolidated financial statements -
unaudited.
5
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
January 31, 2001
A. Basis of Presentation
The accompanying condensed consolidated financial statements are
unaudited. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements should be used in
conjunction with the consolidated financial statements and related notes
contained in the 2000 Annual Report on Form 10-K. The financial
information presented in the condensed consolidated financial statements
reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the period indicated but
not necessarily indicative of future results.
B. Comprehensive Income
We have adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting and presentation of comprehensive income and its components
in a full set of financial statements. No statements of comprehensive
income (loss) have been included in the accompanying unaudited condensed
consolidated financial statements since comprehensive income (loss) and
net income (loss) presented in the accompanying condensed consolidated
statements of operations would be materially the same.
C. Revenue Recognition
We recognize revenue in accordance with Statement of Position ("SOP") 97-
2, Software Revenue Recognition, and SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions.
License. License revenues in connection with license agreements for
standard proprietary and tailored software are recognized upon delivery
of the software, provided collection is considered probable, the fee is
fixed or determinable, there is evidence of an arrangement, and vendor
specific objective evidence exists to defer any revenue related to
undelivered elements of the arrangement.
Maintenance. Maintenance fees are generally billed annually in advance
and the resulting revenues are recognized ratably over the term of the
maintenance agreement.
Services. Revenues derived from services primarily include consulting,
implementation, training, and managed services. Fees are billed under
both time and materials and fixed fee arrangements and are recognized as
the services are performed.
The percentage-of-completion method of accounting is utilized to
recognize revenue on service implementation projects for fixed amounts.
Progress under the percentage-of-completion method is measured based on
management's best estimate of the cost of work completed in relation to
the total cost of work to be performed under the contract. Any estimated
losses on services implementation projects for fixed amounts are
immediately recognized in the condensed consolidated financial
statements.
Deferred Revenues. Deferred revenues represent advance payments or
billings for software licenses, services, and maintenance billed in
advance of the time revenues are recognized.
6
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2001
D. Charge for Asset Impairment and Restructuring
For the nine months ended January 31, 2001, we wrote-off of capitalized
software ($9.5 million) and incurred restructuring charges ($0.9 million)
in the aggregate amount of $10.4 million. The $9.5 million charge was
primarily the result of lower than anticipated sales of our ERP products
in recent periods. We have reduced our workforce by approximately 110
employees and we do not anticipate any future staff reductions. Included
in the $0.9 million restructuring charge was a non-cash charge of
approximately $269,000. All expenses related to this restructuring charge
have been fully recorded and no related accruals remain.
E. Major Customer
One customer accounted for 9% of our total revenues and 14% of services
revenues during the quarter ended January 31, 2001. The related accounts
receivable balance is $2.2 million at January 31, 2001.
F. Purchase of Majority Interest in New Generation Computing
On July 10, 1998, we purchased an 80% interest in New Generation
Computing, Inc., a leading software vendor that specializes in accounting
and manufacturing control software for the sewn goods industry (apparel,
handbags, shoes, hats, etc.). This investment was accounted for based on
the purchase accounting method with the results of operations included
from the date of acquisition. In August 1999, we purchased an additional
6.6% interest and in July 2000 another 6.6% interest, bringing our
ownership interest in New Generation Computing to 93% at January 31,
2001.
G. Industry Segments
We operate and manage our business in four segments based on software and
services provided in four key product markets. First, the Enterprise
Resource Planning (ERP) segment automates customers' internal financing,
human resources, and manufacturing functions. Second, the Business-to-
Business Collaborative Commerce (BBCC) segment provides advanced
business-to-business collaborative planning and integrated logistics
capabilities. Third, the Managed Services Provider (MSP) segment provides
data center infrastructure, network outsourcing services, e-commerce
solution hosting and monitoring, and professional services staffing.
Fourth, the remaining segment (Other) is comprised of the subsidiaries of
ours that do not operate within the three segments as defined and,
individually, represented less than 10% of our revenues during fiscal
years 2001 and 2000. Intersegment charges are based on marketing and
general administration services provided to the BBCC and MSP segments by
the ERP segment. Intersegment charges are also based on managed services
provided to the ERP and BBCC segments by the MSP segment.
7
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2001
H. Net Income (Loss) Per Common Share
Basic income (loss) per common share available to common shareholders is
based on the weighted-average number of Class A and B common shares
outstanding, since we consider the two classes of common stock as one
class for purposes of the per share computation. Diluted income (loss)
per common share available to common shareholders is based on the
weighted-average number of common shares outstanding and dilutive
potential common shares, such as dilutive stock options.
The numerator in calculating both basic and diluted income (loss) per
common share for each year is the same. The denominator is based on the
following number of common shares:
Three Months ended Nine Months ended
January 31, January 31,
2001 2000 2001 2000
--------------------- ------------------
(in thousands, except per share data)
Common Shares:
Weighted average common shares outstanding
Class A Shares 18,689 16,723 18,633 16,753
Class B Shares 4,082 4,753 4,082 4,753
--------- -------- -------- --------
Basic weighted average common shares outstanding: 22,771 21,476 22,715 21,506
--------- -------- -------- --------
Dilutive effect of outstanding Class A common
stock options: - - - 1,258
--------- -------- -------- --------
Total 22,771 21,476 22,715 22,764
========= ======== ======== ========
Net (loss) income: $ (3,880) $ (418) $ (23,486) $ 1,489
Net (loss) income per common share:
Basic $ (0.17) $ (0.02) $ (1.03) $ 0.07
========= ======== ======== ========
Diluted $ (0.17) $ (0.02) $ (1.03) $ 0.07
--------- -------- -------- --------
For the three months ended January 31, 2001 and 2000, approximately 3,588,986
and 84,513 stock options and for nine months ended January 31, 2001,
approximately 685,615 stock options were excluded from the computation of
diluted loss per share because they were anti-dilutive. For the nine months
ended January 31, 2000 options to purchase approximately 1,431,396 shares were
outstanding, but were not included in the computation of diluted earnings per
common share because the options exercise price was greater than the average
market price of the common shares.
8
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2001
Three Months Ended Nine Months Ended
January 31, January 31,
2001 2000 2001 2000
--------------------- ----------------------
Revenues:
Enterprise resource planning 7,081 8,544 21,602 35,074
Business-to-business collaborative commerce 6,485 8,513 20,018 25,436
Managed service provider
External customers 4,253 4,683 11,901 14,402
Intersegment revenues 847 1,074 2,963 3,003
Elimination of intersegment revenues (847) (1,074) (2,963) (3,003)
Other 4,064 4,063 11,933 7,308
-------- ------- ------- -------
21,882 25,803 65,455 82,220
Operating income before intersegment
eliminations:
Enterprise resource planning (489) (1,711) (15,282) (2,297)
Business-to-business collaborative commerce (3,104) 944 (7,039) 2,112
Managed service provider (2,356) (422) (4,715) (121)
Other (300) 318 (87) 540
-------- -------- ------- --------
(6,250) (871) (27,124) 234
Intersegment eliminations:
Enterprise resource planning (214) 160 (275) 473
Business-to-business collaborative commerce 667 632 2,161 1,736
Managed service provider (453) (792) (1,885) (2,209)
Other 0 0 0 0
-------- -------- ------- --------
0 0 0 0
Operating income after intersegment eliminations:
Enterprise resource planning (703) (1,551) (15,558) (1,824)
Business-to-business collaborative commerce (2,437) 1,576 (4,878) 3,848
Managed service provider (2,809) (1,214) (6,601) (2,330)
Other (300) 308 (87) 540
-------- -------- ------- --------
(6,250) (871) (27,124) 234
Capital expenditures:
Enterprise resource planning 132 366 691 721
Business-to-business collaborative commerce 20 141 241 354
Managed service provider 108 87 325 380
Other 8 4 11 7
-------- -------- ------- -------
268 598 1,268 1,462
Capitalized Software:
Enterprise resource planning 0 1,608 534 5,195
Business-to-business collaborative commerce 506 873 2,004 2,518
Managed service provider 0 0 0 0
Other 113 113 337 439
-------- -------- ------- -------
619 2,594 2,875 8,152
Depreciation and amortization:
Enterprise resource planning 1,157 828 3,995 2,485
Business-to-business collaborative commerce 847 929 2,603 2,513
Managed service provider 834 667 2,165 2,001
Other 137 215 287 576
-------- -------- ------- -------
2,975 2,639 9,050 7,575
January 31, April 30,
Identifiable assets: 2001 2000
--------- ----------
Enterprise resource planning 30,930 54,240
Business-to-business collaborative commerce 36,089 44,534
Managed service provider 8,758 7,016
Other 7,553 7,257
--------- ----------
83,330 113,047
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, which are subject
to substantial risks and uncertainties. There are a number of factors that could
cause actual results to differ materially from those anticipated by statements
made herein. The timing of releases of our software products can be affected by
customer needs, marketplace demands and technological advances. Development
plans frequently change, and it is difficult to predict with accuracy the
release dates for products in development. In addition, other factors, including
but not limited to, changes in general economic conditions, technology and the
market for our products and services including economic conditions within the e-
commerce markets, the timely availability and market acceptance of these
products and services, the effect of competitive products and pricing, and the
irregular pattern of our revenues as well as a number of other risk factors
which could affect our future performance.
OVERVIEW
American Software, Inc. ("American Software"), through its subsidiaries,
develops, markets and supports a portfolio of software and services that deliver
e-business (business over the Internet) and enterprise management solutions to
the global marketplace. Our software and services are designed to bring business
value to traditional businesses and e-businesses by supporting their operations
over intranets, extranets, client/servers and the Internet. We launched our
comprehensive suite of e-business solutions in December 1999, positioning
ourselves as a single source e-business solution.
We focus our e-business solutions in five major product and services groups: (i)
e-intelliprise, a fully web-based Enterprise Resource Planning (ERP) solution
which includes both traditional and Flow Manufacturing capabilities; (ii) e-
applications, which are e-business solutions that focus on web-enabling a
specific task for e-businesses; (iii) e-collaboration, provided by Logility
Voyager Solutions(TM), which is an Internet-based suite of business-to-business
collaborative commerce solutions, offered by Logility, Inc., ("Logility") a
subsidiary of American Software; (iv) e-services, which are comprehensive
services to support traditional and e-business solutions; and (v) e-hosting,
which consists of Managed Service Provider (MSP) services provided by AmQUEST,
Inc. ("AmQUEST"), one of our subsidiaries. Our products are designed to bring
rapid business value to customers and to support their transition into e-
business and make existing e-businesses more effective. We also provide support
for our software products, such as software enhancements, documentation,
updates, customer education, consulting, systems integration services,
maintenance and IT hosting.
10
Management's Discussion and Analysis (continued)
The following table sets forth-certain revenue and expense items as a percentage
of total revenues and the percentage increases in those items for the three
months and the nine months ended January 31, 2001 and 2000:
Percentage of Percentage of
Total Revenues % Total Revenues %
-------------------------- ------------------------
Three months ended Change Nine months ended Change
-------------------------- ----------- ------------------------ ------------
2001 2000 01 v. 00 2001 2000 01 v. 00
----------- ----------- ----------- ---------- --------- ------------
Revenues:
License fees 15% 21% (39%) 13% 22% (51%)
Services 58 54 (8) 59 55 (15)
Maintenance 26 25 (10) 28 23 (4)
----------- ----------- ----------- ---------- --------- ------------
Total revenues 100 100 (15) 100 100 (20)
----------- ----------- ----------- ---------- --------- ------------
Cost of revenues:
License fees 8 5 19 7 5 10
Services 53 43 3 52 42 ---
Maintenance 4 9 (60) 7 9 (41)
----------- ----------- ----------- ---------- --------- ------------
Total cost of revenues 65 58 (6) 66 56 (6)
----------- ----------- ----------- ---------- --------- ------------
Gross margin 35 42 (28) 34 44 (38)
----------- ----------- ----------- ---------- --------- ------------
Operating expenses:
Research and development 16 18 (26) 19 18 (19)
Less: Capitalized development (3) (10) (76) (4) (10) (65)
Sales and marketing 23 23 (14) 27 23 (6)
General and administrative 19 13 25 16 13 --
Provision for doubtful accounts 7 1 863 3 -- 684
Charge for asset impairment and
restructuring 1 -- nm 16 -- nm
----------- ----------- ----------- ---------- --------- ------------
Total operating expenses 64 45 20 76 44 37
----------- ----------- ----------- ---------- --------- ------------
Operating income (loss) (29) (3) nm (42) 0 nm
Other income, net (2) 2 nm 1 2 (88)
Minority interest 2 (1) nm 1 -- nm
----------- ----------- ----------- ---------- --------- ------------
Income (loss) before income taxes (29) (2) nm (40) 2 nm
Income taxes 11 -- -- 4 -- nm
----------- ----------- ----------- ---------- --------- ------------
Net income (loss) (18) (2) nm (36) 2 nm
=========== =========== =========== ========== ========= ============
nm - not meaningful
11
Management's Discussion and Analysis (continued)
THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
--------------------------------------------
REVENUES
For the quarter ended January 31, 2001 revenues totaled $21.9 million, down 15%
from $25.8 million in the corresponding quarter of fiscal 2000. This decrease
was primarily due to a decrease in license fee revenues. International revenues
represented approximately 15% of total revenues in the quarter ended January 31,
2001; up from 7% the same quarter ended January 31, 2000.
LICENSES
Software license fee revenues decreased 39% to $3.4 million in the quarter ended
January 31, 2001 from $5.5 million in the corresponding quarter a year ago. We
believe the decrease in license fees was due to the continued reorganization
within our sales management team, which is close to completion, and the
generally slow economic conditions, which appear to be continuing. License fee
revenues from Logility decreased 51% to $1.9 million and constituted 57% of the
total license fee revenues for the three month period ended January 31, 2001,
compared to the same prior year period when they were $3.9 million and comprised
71% of license fee revenues.
SERVICES
Services revenues, which consist primarily of consulting, implementation,
training and managed services, were $12.8 million or 8% lower than the
corresponding quarter a year ago. This decrease was primarily a result of a
reduction in new consulting and implementation projects due to lower prior
period ERP and BBCC sales. The lower license fees in prior periods will continue
to have an effect on services revenues in the near term. Services revenues for
Logility and AmQuest constituted 15% and 37% of total services revenues,
respectively, for the quarter ended January 31, 2001 and constituted 15% and 34%
of total services revenues, respectively, for the quarter ended January 31,
2000. Services revenues constituted 58% and 54% of total revenues for the
periods ending January 31, 2001 and January 31, 2000, respectively.
MAINTENANCE
Maintenance revenues decreased 10% in the third quarter of fiscal year 2001 to
$5.8 million from $6.4 million for the same prior year period. The decrease for
the quarter is due to the slowdown in license fees in the prior periods.
Maintenance revenues have a direct relationship to current and historic license
fee revenues, since licenses are the source of potential new maintenance
customers. The lower license fees in prior quarters will continue to have an
effect on future maintenance revenues in the near term.
GROSS MARGIN
The total gross margin in the quarter ended January 31, 2001 was 35% compared to
42% a year ago. This decrease is largely due to a decrease in the license fees
gross margin to 51% this quarter compared to 75% in the same quarter a year ago,
which was due to the combination of reduced total license fees in the most
recent quarter and the relatively fixed amount of amortization expense on
capitalized software, which makes up the primary component of cost of license
fees. The gross margin on services revenues decreased to 9% compared to 19% the
same quarter a year ago. This was due to the higher margin services work related
to the "Year 2000" remediation being performed in the third quarter of fiscal
year 2000 compared to the lower margin services work that is currently being
performed. Maintenance gross margin increased to 83% when compared to 62% during
the same period one year ago. This increase was primarily due to the increased
maintenance revenues of Logility and the cost management efforts in the ERP
area, which began in the prior fiscal year.
12
Management's Discussion and Analysis (continued)
RESEARCH AND DEVELOPMENT
Gross product development costs include all non-capitalized and capitalized
software development costs. A breakdown of the research and development costs is
as follows:
Three Months Ended
----------------------------------------
Jan. 31, Percent Jan. 31,
2001 Change 2000
---------- ----------- ----------
Gross product development costs $ 3,516 (26%) $ 4,773
Percentage of total revenues 16% 18%
Less: acapitalized development (619) (76%) (2,594)
Percentage of gross prods. dev. costs 18% 54%
---------- ----------- ----------
Product development expenses $ 2,897 33% $ 2,179
Percentage of total revenues 13% 8%
Gross product development costs decreased 26% in the quarter ended January 31,
2001, compared to the prior year. This is a result of cost containment and
restructuring efforts in response to lower license fees. Capitalized development
decreased as well by 76% for the quarter ended January 31, 2001 compared to the
prior year, while the rate of capitalized development decreased to 18% from 54%
for the quarter ended January 31, 2001 compared to the prior year. These
reductions are due to the cost containment and restructuring efforts, as well as
a reduction in capitalizable projects that occurred earlier in the current
fiscal year. Product development expenses, as a percentage of total revenues,
increased to 13% in this quarter compared to 8% in the prior year due to the
decrease in total revenues and the decrease in capitalized development costs as
noted above.
SALES & MARKETING
Sales and marketing expenses decreased 14% to $5.1 million for the quarter ended
January 31, 2001 compared to $5.9 million for the same period a year ago. This
decrease is due primarily to the restructuring efforts that occurred earlier in
the current fiscal year. As a percentage of total revenues, sales and marketing
expenses were 23% for the quarter ended January 31, 2001 and for the quarter
ended January 31, 2000. We anticipate that sales and marketing expenses will
increase as we pursue increased market share in the BBCC arena.
GENERAL & ADMINISTRATIVE
General and administrative expenses increased 25% to $4.2 million for the
quarter ended January 31, 2001 compared to $3.4 million for the same period last
year primarily as a result of a charge for audit and legal fees related to
financing activities of the AmQUEST subsidiary. As a percentage of total
revenues, general and administrative expenses were 19% for the quarter ended
January 31, 2001 compared to 13% for the quarter ended January 31, 2000.
PROVISION FOR DOUBTFUL ACCOUNTS
For the quarter ended January 31, 2001 we incurred a charge of $1.5 million
primarily as a result of difficult customer collections of Internet related
businesses.
13
Management's Discussion and Analysis (continued)
CHARGE FOR ASSET IMPAIRMENT AND RESTRUCTURING
For the quarter ended January 31, 2001, we incurred a charge against earnings of
$242,000, as a result of these restructuring activities. The restructuring
charge is the result of severance expenses for approximately 46 employees in
Sales, Marketing, Services and Research and Development. Of this amount,
$234,000 related to cash severance and $8,000 related to the acceleration of
vesting of stock options to terminated staff.
OTHER INCOME/MINORITY INTEREST
Other income is comprised predominantly of interest income, gains and losses
from sales of investments and changes in the market value of investments. Other
income decreased to $474,000 in the quarter ended January 31, 2001 compared to
$625,000 for the same period a year ago. Minority interest is based on our
subsidiary's earnings (loss). Minority interest increased to $487,000 in the
quarter ended January 31, 2001 compared to ($172,000) for the same period a year
ago. This increase is primarily related to Logility's losses in the current
period, compared to Logility's earnings in the prior year period.
LOSS ON IMPAIRMENT OF INVESTMENTS
For the quarter ended January 31, 2001, we incurred a charge against earnings of
$1.0 million for other than temporary losses in our cost-method investments in
internet-related companies, and a majority-owned subsidiary exiting the internet
consulting business.
INCOME TAXES
For the quarter ended January 31, 2001, we recorded an income tax benefit of
$2.4 million as a result of an income tax refund in the amount of $705,000 and a
reduction in income tax liability in the amount of $1.7 million based on current
estimates of future tax liabilities, including penalties and interest. For the
quarter ended January 31, 2000 we did not record any income taxes as a result of
operating losses incurred in prior periods.
NINE MONTHS ENDED JANUARY 31, 2001 AND 2000
-------------------------------------------
REVENUES
Revenues for the nine months ended January 31, 2001 totaled $65.5 million, down
20% from $82.2 million in the prior year period. International revenues
represented approximately 11% of total revenues for the nine months ended
January 31, 2001 compared to approximately 7% for the same period a year ago.
The increase in international revenues is largely due to the decrease in
domestic revenues, increasing the international proportion of the overall
revenue mix.
LICENSES
For the nine months ended January 31, 2001, license fee revenues decreased 51%
from a year ago. We continued to experience lower license fee sales due to the
general slowing in the economic conditions and the continued reorganization
within our sales management team. License fee revenues from Logility decreased
51% to $6.0 million and constituted 69% of the total license fee revenues for
the six month period, compared to the same prior year period when they were
$12.2 million and constituted 68% of the total license fee revenues.
14
Management's Discussion and Analysis (continued)
SERVICES
Services revenues were $38.5 million or 15% lower than the corresponding nine-
month period. This decrease was primarily a result of a reduction in new
consulting and implementation projects due to lower prior period ERP sales. Due
to the decrease in new projects for the ERP area, a reduction in personnel
services occurred during the nine-month period as part of our restructuring
efforts. Services revenues for Logility and AmQuest constituted 17% and 32% of
total services revenues, respectively, for the nine months ended January 31,
2001 and constituted 13% and 31% of total services revenues, respectively, for
the nine months ended January 31, 2000. Services revenues constituted 59% and
55% of total revenues for the nine-month period ending January 31, 2001 and
January 31, 2000, respectively.
MAINTENANCE
For the nine months ended January 31, 2001, maintenance revenues decreased 4%,
to $18.1 million compared to $18.9 million in the prior year period. The
decrease for the year-to-date is due to the slowdown in license fees in the
prior periods. Maintenance revenues have a direct relationship to current and
historic license fee revenues, since licenses are the source of potential new
maintenance customers.
GROSS MARGIN:
For the nine months ended January 31, 2001, the gross margin was 34% compared to
44% for the same period a year ago. This decrease was largely due to a decrease
in the license fees gross margin to 49% compared to 77% in the prior nine month
period which was due to the combination of reduced total license fees in the
most recent nine month period and the relatively fixed amount of amortization
expense on capitalized software, which makes up the primary component of cost of
license fees. The gross margin on services revenues decreased to 12% compared to
24% in the same period a year ago. This is due to the higher margin services
work related to the "Year 2000" remediation being performed in the first and
second quarters of fiscal year 2000 compared to the lower margin services work
that is currently being performed. Maintenance gross margin increased to 76%
when compared to 60% during the same period one year ago. This increase was
primarily due to the increased maintenance revenues of Logility and the cost
management efforts by the ERP area that were begun in the prior fiscal year.
RESEARCH AND DEVELOPMENT
Gross product development costs include all non-capitalized and capitalized
software development costs. A breakdown of the research and development costs is
as follows:
Nine Months Ended
------------------------------------------
Jan. 31, Percent Jan. 31,
2001 Change 2000
----------- ----------- -----------
Gross product development costs $ 12,166 (19%) $ 14,979
Percentage of total revenues 19% 18%
Less: capitalized development (2,875) (65%) (8,152)
Percentage of gross prods. dev. Costs 24% 54%
----------- ----------- -----------
Product development expenses $ 9,291 36% $ 6,827
Percentage of total revenues 14% 8%
15
Management's Discussion and Analysis (continued)
Gross product development costs decreased 19% for the nine months ended January
31, 2001 primarily as a result of cost reduction efforts in response to the
lower license fees. Capitalized development decreased 65% for the nine months
ended January 31, 2001, while the rate of capitalized development decreased to
24% from 54% for the same period due to the cost reduction efforts, as well as
the reduction in capitalized projects. Product development expenses, as a
percentage of total revenues, increased to 14% from 8% for the nine months ended
January 31, 2001 primarily as a result of the decrease in total revenues and the
reduction in capitalized development costs as noted above.
SALES & MARKETING
Sales and marketing expenses decreased 6% to $17.8 million for the nine months
ended January 31, 2001. This decrease is due primarily to the restructuring
efforts that have occurred during the current fiscal year. As a percentage of
total revenues, sales and marketing expenses were 27% for the nine months ended
January 31, 2001 when compared to 23% for the comparable period last year. This
increase is due to the decrease in revenues.
GENERAL & ADMINISTRATIVE
General and administrative expenses remained relatively constant at $10.3
million for nine months ended January 31, 2001 compared to $10.4 million for the
same prior year period.
PROVISION FOR DOUBTFUL ACCOUNTS
For the nine months ended January 31, 2001 we incurred a charge of $1.8 million
primarily as a result of difficult customer collections of Internet related
businesses.
CHARGE FOR ASSET IMPAIRMENT AND RESTRUCTURING
For the nine months ended January 31, 2001, the Company incurred a charge
against earnings of $10.4 million. This charge was a result of the write-off of
certain capitalized software development costs in the amount of $9.5 million,
and a restructuring charge of $970,000. These charges were primarily a result of
lower than anticipated sales of our ERP products in recent periods. We believe
the charge for the asset impairment will bring the amount of capitalized
software in line with the revised forecasts of future ERP sales. The
restructuring charge is the result of severance expenses for approximately 110
employees in Sales, Marketing, Services and Research and Development. Included
in the $970,000 was a non-cash charge of approximately $270,000 related to the
accelerating of vesting of stock options for the severed employees.
OTHER INCOME/MINORITY INTEREST
Other income is comprised predominantly of interest income, gains and losses
from sales of investments and changes in the market value of investments. Other
income decreased to $1.6 million for the nine months ended January 31, 2001
compared to $1.7 million for the same period a year ago. Minority interest is
based on our subsidiaries earnings (loss). Minority interest increased to $1.0
million for the nine months ended January 31, 2001 compared to ($341,000) for
the same period a year ago. This increase is primarily related to Logility's
losses in the current period, compared to Logility's earnings in the prior year
period.
16
Management's Discussion and Analysis (continued)
LOSS ON IMPAIRMENT OF INVESTMENTS
For the quarter ended January 31, 2001, we incurred a charge against earnings of
$1.3 million for other than temporary losses in our cost-method investments in
internet-related companies, and a majority-owned subsidiary exiting the internet
consulting business.
INCOME TAXES
For the nine months ended January 31, 2001, we recorded an income tax benefit of
$2.4 million as a result of an income tax refund in the amount of $705,000 and a
reduction in income tax liability in the amount of $1.7 million based on current
estimates of future tax liabilities. In the prior year nine-month period income
tax expense in the amount of $150,000 was recorded based on an estimate for our
tax liability for the fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
The following table shows information about our cash flows during the nine
months ended January 31, 2001 and January 31, 2000. You should read this table
and the discussion that follows in conjunction with our condensed consolidated
statements of cash flows contained in "Item 1. Financial Statements" in Part I
of this report and in our Annual Report on Form 10-K for the fiscal year ended
April 30, 2000.
Nine Months Ended
January 31,
--------------------
2001 2000
------- -------
Net cash provided by operating activities before
Changes in operating assets and liabilities. (4,400) 9,405
Increase in operating assets and liabilities 1,862 3,614
-------------------
Net cash provided by operating activities (2,538) 13,019
Net cash provided by (used for) investing activities 120 (14,834)
Net cash provided by (used for) financing activities (1,304) (2,555)
-------------------
Net(decrease) increase in cash and cash equivalents (3,722) (4,370)
===================
We fund our operations and capital expenditures primarily with cash generated
from operating activities. The changes in net cash used for operating activities
generally reflect the changes in net income and non-cash operating items plus
the effect of changes in operating assets and liabilities, especially trading
securities, trade accounts receivable, trade accounts payable, accrued expenses
and deferred revenue.
Our operating activities used cash of approximately $2.5 million in the nine
months ended January 31, 2001, and provided cash of approximately $13.0 million
in the same period last year. Operating cash flows decreased for the period
primarily because the net loss for the period and the net changes in operating
assets and liabilities, such as trade accounts payable and deferred revenue,
were only partially offset by non-cash operating items, such as charge for asset
impairment, depreciation and amortization and provision for doubtful accounts.
17
Management's Discussion and Analysis (continued)
Cash provided by investing activities was approximately $120,000 for the nine
months ended January 31, 2001 and cash used in investing activities was
approximately $14.8 million in the same period of the prior year. Investing cash
flows increased for the period primarily because additions to capitalized
software development was $2.9 million in the current period, compared to $8.2 in
the same prior year period. In addition, there were sales of short term
investments in the amount of $5.5 million for the nine month period ended
January 31, 2001 compared to purchases of investments in the amount of 3.3
million in the same prior year period.
Cash used in financing activities was approximately $1.3 million and $2.6
million for the nine months ended January 31, 2001 and 2000, respectively.
Financing cash flows decreased for the period primarily because there were no
repurchases of common stock during the nine months ended January 31, 2001 and
there were repurchases of common stock in the prior year period of $1.3 million.
In addition, proceeds from exercise of stock options were $382,000 in the
current nine-month period, compared to $1.3 million in the prior year nine-month
period.
Days Sales Outstanding in Accounts Receivable was 63 days as of January 31, 2001
compared to 72 days as of January 31, 2000.
Our current ratio was 1.5 to 1 and cash and investments totaled 37% of total
assets at January 31, 2001 compared to 2.0 to 1 and cash and investments
representing 46% of total assets at January 31, 2000. Our principal sources of
liquidity are our cash and investments, which totaled approximately $30.6
million at January 31, 2001. We believe that our sources of liquidity and
capital resources will be sufficient to satisfy our presently anticipated
requirements during at least the next twelve months for working capital, capital
expenditures and other corporate needs. However, due to the uncertainty in the
current economic environment we may need to seek additional sources of capital
to meet our requirements. We will be required to raise additional funds through
equity or debt financing. We do not currently have a bank line of credit. No
assurance can be given that bank lines of credit or other financing will be
available on terms acceptable to us. If available, such financing may result in
further dilution to our shareholders and higher interest expense.
On December 18, 1997, our Board of Directors approved a resolution authorizing
the Company to repurchase up to 1.5 million shares of the Company's Class A
common stock. On March 11, 1999, our Board of Directors approved a resolution
authorizing us to repurchase an additional 700,000 shares for a total of up to
2.2 million shares of our Class A common stock. These repurchases have been and
will be made through open market purchases at prevailing market prices. The
timing of any repurchases will depend upon market conditions, the market price
of our common stock and management's assessment of our liquidity and cash flow
needs. Since the adoption of these resolutions, we have repurchased
approximately 1.6 million shares of common stock at a cost of approximately $5.6
million as of January 31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement was amended in June 2000 by Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." Statement No. 138 will
be effective for us beginning May 1, 2001. The new Statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
accounting treatment for three types of hedges: (1) hedges of changes in the
fair value of assets, liabilities, or firm commitments; (2) hedges of the
variable cash flows of forecasted transactions; and (3) hedges of foreign
currency exposures of net investments in foreign operations. We have not
invested in derivative instruments or participated in hedging activities and,
therefore, does not anticipate there will be a material impact on its results of
operations or financial position from Statement No. 133 or No. 138.
18
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March and June 2000. We are required to adopt the
provisions of SAB 101 in our fourth quarter of fiscal 2001. In October 2000, the
SEC issued further guidance with respect to adoption of specific issues
addressed by SAB 101. Management does not currently believe the adoption of SAB
101 will have a material effect on our consolidated financial position or
results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
In the quarter ended January 31, 2001, we generated 9% of our revenues outside
the United States. International sales usually are made by our foreign
subsidiaries and are denominated typically in U.S. Dollars or British Pounds
Sterling. However, the expense incurred by foreign subsidiaries is denominated
in the local currencies. The effect of foreign exchange rate fluctuations on us
during the quarter ended January 31, 2001 was not material.
Interest rates
We manage our interest rate risk by maintaining an investment portfolio of
available-for-sale instruments with high credit quality and relatively short
average maturities. These instruments include, but are not limited to, money-
market instruments, bank time deposits, and taxable and tax-advantaged variable
rate and fixed rate obligations of corporations, municipalities, and national,
state, and local government agencies, in accordance with an investment policy
approved by our Board of Directors. These instruments are denominated in U.S.
dollars. The fair market value of securities at January 31, 2001 was
approximately $21.5 million. Interest income on our investments is carried in
"Other income/(expense)."
We also hold cash balances in accounts with commercial banks in the United
States and foreign countries. These cash balances represent operating balances
only and are invested in short-term time deposits of the local bank. Such
operating cash balances held at banks outside the United States are denominated
in the local currency.
Many of our investments carry a degree of interest rate risk. When interest
rates fall, our income from investments in variable-rate securities declines.
When interest rates rise, the fair market value of our investments in fixed-rate
securities declines. In addition, our investments in equity securities are
subject to stock market volatility. Due in part to these factors, our future
investment income may fall short of expectations or we may suffer losses in
principal if forced to sell securities, which have seen a decline in market
value due to changes in interest rates. We attempt to mitigate risk by holding
fixed-rate securities to maturity, but, if our liquidity needs force us to sell
fixed-rate securities prior to maturity, we may experience a loss of principal.
We believe that a 10% fluctuation in interest rates would not have a material
effect on our accompanying statement of operations.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
We are not party to any material legal proceedings
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits: None
(b) No report on Form 8-K was filed during the quarter ended
January 31, 2001.
20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN SOFTWARE, INC.
DATE March 15, 2001 /s/ James C. Edenfield
------------------ -------------------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE March 15, 2001 /s/ Vincent C. Klinges
------------------ -------------------------------------
Vincent C. Klinges
Chief Financial Officer
DATE March 15, 2001 /s/ Deirdre J. Lavender
------------------ -------------------------------------
Deirdre J. Lavender
Controller and Accounting Officer
21